Investing in Student Accommodation

Student accommodation is a relatively young asset class that has experienced a massive upsurge in popularity among investors in recent years. Within the time span of as little as 10 years this sector has exploded into a lucrative market which according to property advice service CBRE saw an investment of over £2.4billion in 2014 alone.

An ever-growing number of both domestic and international students enable the market to continue to grow, with universities bursting at the seams and not in a position to offer good quality accommodation to their students. Even during the financial crisis 2007/08, when most other asset classes decreased in value, the student housing market remained strong, creating a reliable income stream for investors. High demand, low supply and exceptionally high gross returns of up to 10%, make the student accommodation market a sustainable and lucrative investment opportunity for savvy investors.

Gone are the days of dingy student house-shares in equally dreary university-run halls of residence. Students are no longer as financially stringent as once they were, no longer willing to accept cheap, sub-par accommodation. Today’s students are savvy consumers, they want the best-possible accommodation and more than willing to pay a premium for such a privilege.

Instead, this new generation of students favour convenience and luxury over price, paying more for the ease of having everything under one roof like free Wi-Fi, communal areas, on-site gyms and even cinema rooms. Even the apartments themselves have changed, with single beds and shared bathrooms shunned in favour of light and spacious studio apartments, with all the privacy and luxury that would be expected in the residential market.

One of the main lures for investors is the incredibly attractive starting prices. Often under £30,000 cheaper than their mainstream residential counterparts, investors enjoy the lower entry prices in the student accommodation sector, mainly because a lower initial outlay means higher NET yields. Along the same vein, the lower entry prices in the student accommodation market also means that investors pay less Stamp Duty tax, as well as other necessary ancillary costs, making the whole investment significantly more affordable.

Because of the low available supply and ever-growing demand, Purpose-Built Student Accommodation (PBSA)—that is, private student accommodation built in large university cities off the main university campuses—is in the unique position of having the pick of the crop. Since students are desperate for a sense of independent living, those who do have first refusal of the on-site university-provided halls of residence even shun this, preferring the newer bespoke accommodation offered by independent private providers. As a result, PBSA is always in high demand, which means that there is a low tenant turnover, and thus diminished opportunities for void periods where the property sits untenanted.

The supply/demand imbalance is perhaps more acute in the student accommodation sector than any other in the current market. This is because every year more universities see more applications than ever, and thus the number of students increases rapidly. Available accommodation has not been growing at the same substantial level, so more students are fighting for the same amount of available beds. This has long since been a problem in the student market, with most universities unable to cope with demand—so much so that most establishments can only accommodate a selection of first-year students on-site, with the rest of the students having to fend for themselves in a highly competitive market.

Because of the low initial outlays, student accommodation investors tend to enjoy substantial gross returns, which translate into above-average NET returns that often surpass the national average for residential buy-to-let opportunities.

As with all property investments in today’s market, student accommodation is not immune to the potential for vast capital appreciation when the time comes to sell.

Student accommodation comes with the added benefit of high demand, low void periods and excellent returns, which makes reselling on the open market easy for most investors.